Turkish Central Bank Governor Erdem Başçı stated on Monday that measures taken by developed countries following the sovereign debt crises in the eurozone had caused the possibility of financial instability in emerging economies.

Speaking at the “Conference on Financial and Macroeconomics Stability: Challenges Ahead” organized by the central banks of Turkey, Brazil and Finland, and the Journal of Financial Stability in İstanbul, he emphasized the monetary and financial policies implemented by these developed economies brought risks even for emerging countries with strong macroeconomic foundations. “Taking these risks into account,” he said, “we protected both price and financial stability by implementing a flexible monetary policy.”

Başçı explained that following the crises, the importance of the financial sector increased. Policymakers understood that instability in the sector would cause major damage in the real economy, noting that joint enforcement of policies to provide macroeconomic and financial stability was the most difficult task.

The governor stated, “Findings of platforms such as G-20 and the International Monetary Fund (IMF) indicate that many questions have emerged concerning the draft and implementation of monetary policy due to the rising importance of financial stability needed for microeconomic stability.

“In addition, we can include sustainable growth; low inflation; a stable rise in employment rates; and a balanced public budget as the main indicators of macroeconomic stability. Economists who shunted the issue of financial stability until the 2008-09 financial crises became aware of the significance of these indicators for social welfare and are looking at ways to develop new strategies to overcome the problems,” he said. Meanwhile, noting the importance of foreseeing the risks that can rise from within the financial sector, he implied that with the deepening financial integration of emerging economies to the global economy, financial transactions become indispensible as part of economic activities. Başçı said, “Managing these risks in the financial sector is crucial as it carries major importance for the health of the economy.”

He also pointed out that another factor that threatens financial stability is the movement of international capital, saying, “The free flow of capital contributes to economic growth in countries, but when the movement of capital is not stable, these economies can receive severe damage.” He added, “Especially the short-term capital flow, which eases the access to loans and increases consumption, but at the same time can cause the excessive appreciation of domestic currency. This can bring division between domestic and international demand and, in return, ruin external balance, leading to radical changes such as the sudden exit of capital, which has happened many times in our country and in many developing countries. So, being able to control volatile capital flow is of major importance. “As of the end of 2010, the implementation of flexible monetary policies as well as appropriate measures taken by the Banking Regulation and Supervision Agency [BDDK] have favored the Central Bank and we expect positive results in terms of both price and financial stability in 2012,” he said. Continuing his speech, Başçı recalled that international criteria such as Basel III have been established to strengthen the capital structure of financial institutions. “These criteria prepare a financial sector that is resistant to unforeseen risks.” Başçı also complained about the inadequate number of theoretical and empirical studies about the issue of transferring mechanisms from financial stability to macroeconomic stability and called on academics to conduct such research.

During the two-day conference, panelists will discuss the dynamics of the banking sector; precautionary policies in banking and its impact on macroeconomic stability; systemic risk; and public debt dynamics. Also, central bank governors will share their experiences and how the global economic slowdown has affected the central banks. It is expected that the topics discussed in the conference will enable the participants to have a good understanding of issues that threaten financial and macroeconomic stability, and lead to determining policies to achieve that stability.